Welcome to Vestas Wind Systems A/S information meeting.
Good morning all, and welcome to our investor call here this morning. This is Lars Villadsen, head of investor relations speaking, and together with me on this call I have our Chairman of the Board, Bert Nordberg, and our CFO and acting CEO, Marika Fredriksson. Operator, please turn to slide two. As you can see and as you all know, we have released two separate announcements this morning. One, announcement on the appointment of our new CEO, Anders Runevad, and the second one, on our second quarter earnings release. Consequently, we will also have two separate tracks in this call. First, our Chairman of the Board, Bert Nordberg, will give a brief introduction and statement on the appointment of Anders Runevad as our new CEO, and then we will open up for questions and answers on that particular topic.
Then we will close the questions and answers, and Bert will leave the call, and Marika Fredriksson will take you through our second quarter financials. As always, there will be a session with questions and answers on our second quarter financials, and at the end of Marika's presentation. If you turn to slide three, operator, then I would like to hand over the word to our Chairman of the Board, Mr. Bert Nordberg.
Well, good morning everybody, and thank you for calling in to the investor call. My participation in this call is to give a background on the appointment of a new CEO of Vestas Wind Systems. In the board, we have taken the decision to work on sort of different tracks. One track is, of course, to stabilize the company, and we feel that we have, step by step, come into a more stable situation where we have taken a firm grip on the balance sheet, and we feel that now is the moment to change the CEO to get a new leadership in the company. At the board and the nomination committee who has worked thoroughly with this recruitment, we started by creating a profile of what we were looking for and what would be the perfect candidate for Vestas.
We needed a candidate that has experience in complex business environment and making deal in very complex environment. The candidate should also have a very broad international business experience. He should be used to complex business deal in the infrastructure world. The candidate should have had proven results, especially on profitability of those deals. The candidate should also be used to work in the political environment and be very knowledgeable about political lobbying, which is part of this kind of business. We also require deep technical understanding and a top education and a master of science, and then at least a decent understanding of business-to-business experience. What was not in the profile was race, gender, or nationality.
We have looked and we have found a candidate, a candidate, that you see in the slide with the background, where I think Anders matched very well the profile we were looking for. He's very experienced in international business. He has lived in several parts of the world. He's done international and complex business deal in the infrastructure business, and that will be crucial for us. The reason for this leadership change is that we now want to finalize the restructuring, and we want to go into stable, profitable growth of this company. Stability is what we are looking for, and we feel that our candidate is the right profile to ensure that Vestas become a very, very stable, long-term company. Also, Anders has a broad experience in building up services business, which we feel is a great opportunity for the future.
By that, I leave the floor open for questions.
Thank you. We will now begin the first question and answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Daniel Patterson from SEB is on the line with a question.
Yes, good morning everybody. I have a question relating to the, let's say, the role of the new CEO, in particular regarding the cooperation with the newly created position of Chief Operating Officer last summer. Could you give us a little bit of flavor of how the new CEO is going to sort of prioritize his time regarding operations versus sales versus investors? Any flavor on that would be helpful. Thank you.
Okay. I think we have been quite successful in the recruitment of Jean-Marc Lechêne, our COO, and I feel comfortable about his ability and the way he runs the CEO position. We have a sort of a strong CFO that will speak after me. We have a good chief sales officer, and we have a brilliant head of technology and services. So Anders is as a CEO, he has total overall responsibility. The focus for our from me in the discussion with Anders is to first ensure that the company come back to profitability and a stable profitability ground, and also that increase the focus on the services business and ensure that all the deals we make have a good profitability.
So, I think he will be very active in the sales arena in the beginning to ensure that he understands how the profitability works and the pricing algorithm in this world works. I also think that Anders is a good coach and will work very well together with the team. But in the end, he is the CEO, so he's overall responsible for all the things. But the priority now is to get into the profitability road.
Can we assume that Anders Runevad will also conduct investor relations, do roadshows, and continue this new, let's say, improved investor relations policy that the company has had in the last couple of years?
Yes, you can definitely expect that.
Okay. Thank you.
Shai Hill from Macquarie is on the line with a question.
Yes, good morning. It's Shai Hill at Macquarie, in London. Two questions, please, to the chairman. You talk about the nominations committee drawing up a profile. When did the committee decide to replace Ditlev Engel as CEO? That's the first question. And the second question is, did you, I'm assuming, but correct me, that you knew the new CEO from, from Ericsson. So you had some experience of working together or you've known him well?
Well, the decision was taken a while ago, that we should start looking to see to be prepared, if we could find a profile that was perfect. When Anders was identified, the nomination committee is the vice chairman. It's me. It's Jørgen Huno Rasmussen and Jørn Ankær Thomsen of the board. And I knew Anders pretty well, so I decided that the other three have been the main interviewers, and I could only be a reference to Anders for what he achieved as head of Europe in Ericsson. We feel that we are fortunate to find that profile. So, the appointment is made, and wouldn't be made if we didn't find someone that matched the profile that we were looking for. But we are very happy.
It's taken a while, but we are very happy that we found this profile.
Right. Thank you. Could I just push you a little bit more if you can be more precise on when you took the decision, to replace Ditlev Engel?
No.
Okay. Thank you.
Ben Backwell from Recharge is on the line with a question.
Yes. Hello, Bert. I have another question about the CEO transition. Did the decision to replace Ditlev Engel have anything at all to do with the ongoing revelations around Project Dragon and the affair involving Mr. Nørremark? First question. And my second question is, are the negotiations with Mitsubishi still going on?
The first question is that it has nothing to do with that. That decision is that the board felt that it's time to look for a new leadership. It's nothing to do with all the different legal processes that have been announced. So, there is no connection to them. The other thing is that when it comes to Mitsubishi, we have press released that we are in negotiation with Mitsubishi to the stock market. If those negotiations were closed down, we would press release that.
Okay. Thanks very much.
Jens Hansegard from Wall Street Journal is on the line with a question.
Hi. Yeah. I was wondering if you could maybe provide some background on the sort of reasoning behind the transition, because it seems sort of odd that you would have an interim CEO only for 11 days. And, you know, sort of when was and also when was Ditlev made aware that he would be leaving Vestas?
Yeah. Sort of, I don't know if it's an odd decision. I think it's fortunate that we are 11 days after the appointment and have been able to negotiate with Anders' employer to get him released for the 1st of September. We had a board meeting yesterday where the formal decision was taken, and then we have 24 hours to inform the market, which we did. We did it in connection to this Q2 report. And then, after that, Marika has to be in charge because we don't feel that a CEO who has been appointed announced leaving should be present there and work those 11 days. We are perfectly comfortable with Marika handling the company for 11 days. What was your other question? When was Ditlev aware?
I was wondering when Ditlev was made aware, my sort of, like, it seems a rough transition. I was sort of if you had some reasoning behind that.
Well, Ditlev, when he was aware, it is, sort of, of course, in connection to the board meeting. So that was yesterday.
So, he had no, he wasn't aware prior to this. And, you know, I'm sort of trying to figure out what his role in this is.
No, I, I don't understand why you asked that. I told you that he was aware and he was made redundant from a CEO yesterday. I don't know what you're looking for.
No, that's it. Thanks.
Thanks.
Patrik Setterberg from Nordea is on the line with a question.
Hello, Chairman. I have a question regarding this, as you call it, the profitability road. Now with the new management in the company, will the new management come back with more firm financial targets? Well, the new management, you have to give them a chance to work together for a while. What I'm saying that the company and the board's wish is to put the company on a track where we go towards profitable growth. That's what I can comment today. As you've seen in the report, we have increased the cash flow forecast for the year. If there is any other change in the forecast, that will come when we feel it's safe that the management feel safe that they can provide it.
Okay. Thank you.
Thank you.
Operator, can we have one final question for Bert Nordberg, please?
Richard Milne is on the line with the last question of round one.
Yeah. Hi, Mr. Nordberg. Richard Milne from The Financial Times. Just,
Hi.
Two quick questions. There's obviously been a lot of investor criticism of Mr. Engel. Can you say what role did that play a role in your decision? And the second question, you're saying that you want to stress profitable growth, to make sure every deal is profitable. Is that, in some ways, an implicit criticism of what's gone on previously?
I think there's been a sort of, even if the market looks more bright today, there's been a fight where we've been forced to fight on the pricing side in certain deals, which I think is sad. But we need to understand that in the end, the company must have a sort of sustainable profitability, and that's what we are looking for in the board with the new era going forward. When it comes to Ditlev and myself, we have had a really good cooperation. Ditlev and I'm totally satisfied with the steps been taken and the plans we have made in the board together with the management and how they have been implemented.
But we still feel that, after 8.5 years, we're looking for a tweak of the culture, more focused on the profitability and a future without surprises. So, I can only say that Ditlev has fulfilled what I have asked him to do, what the board have asked him to do. So we have no criticism of that. He understands that the company and the board wants a different leadership going forward, and we're still good friends.
With that, Operator, we would like to close the Q&A session and go further to the Q2 financial presentation, please.
Okay. We leave over to Marika. Thank you very much, everybody.
Thank you. Operator, if we can turn to slide number 5. I would like to welcome everyone and also thank you for participating in this Q2 earnings call for Vestas. The agenda is as follows, an introduction part, financial, order intake, and outlook, which all will be presented by me, Marika Fredriksson. We will also have a Q&A session, and that, again, will be me and Lars Villadsen, head of IR in Vestas. By that, we go to the main presentation part and the introduction part on slide number 8. There are three core focus areas in Vestas, and that is continuous priority going forward. It is continue reduced cost through the operational excellence, also continue to re-reduce investment, which we have proven so far. We will also continue our path on the improved capacity utilization and capital efficiency.
We will get into more of the details in the improvements of the net working capital and the net working capital management. So, thereby, I'm saying that we're continuing the turnaround plan and continue on our efforts to improve the operational excellence for Vestas. Please turn to slide number 9. The fixed cost savings continues, and we continue to it's slide number 10, sorry. If we turn to slide number 10 and the fixed cost savings, we have continued to reduce the number of employees in the quarter. And you can see if you compare to the full year of 2012, we have continued to reduce the number of salaried employees. As we've said, the hourly paid employees will go a little bit up and down in the quarter depending on the activity.
And here you can clearly see, and we will come into the details, that we have decided to keep the tower plant in Pueblo and also ramp up the activities in the plant. Operator, please turn to slide number 11. The lower CapEx focus continues, and you can see if you compare Q2 of 2012 with 2013, that we have reduced the CapEx by more than 62% compared to a year ago. And this is, as has been communicated earlier, no new factories, which, of course, has a significant impact on the reduction. Operator, again, turn to slide number 12. We continue the capital efficiency and capacity utilization. A lot of focus in Vestas and a lot of focus from my side on the net working capital that has a proven result. And we have continued the improvements on the cash collection.
We also have sale of a wind power plant in the quarter, and we continue the focus on improving the overall net working capital. The assets held for sale have changed since the last quarter or rather the decision to divest. So we have now a decision to keep the tower factory in Pueblo and actually ramp up the activities. The machining and casting units will be divested, and I will come back to in the financial part more of the technical reversals in the balance sheet. So if we go into the financial part and thereby slide number 14, Q2 of this year is represented by a lower activity. And thereby the shipments and the deliveries is reduced compared to Q2 in 2012, which again was a very high activity quarter compared to Q2 of this year.
So you can see shipments are down by 47% and deliveries 33%. The shipments are mainly affected by lower activity in Americas. If you turn to slide number 15 and have a look at the income statement, you can see that the revenue is down quite significantly, is down by 26, 26%. Despite that, we managed to deliver an EBIT before special items that is positive. And you can also see here on the special items that is mainly represented by write-downs. If we go to slide number 16 and compare the EBIT development in Q2 of this year compared to last year, you can see that the project volume, as stated earlier, has a significant impact, also the project margins. That has to certain extent or quite a large extent been compensated by continued reduction on the fixed capacity cost.
If we go to slide 17 and look at the EBIT development quarter-over-quarter this year, we said in Q1 that the project margins in Q1 were not representative for the order backlog we have in the company. Q1 was affected by a couple of lower-margin projects. And here you can clearly see if you compare to Q1 that the project margins in Q2 are higher and thereby have a positive impact on the EBIT. If you go to next slide, slide 18, and look at the reduction of employee cost. And here you can see we continue to reduce the number of employees despite ramping up and keeping the tower factory in Pueblo. I think it's worth noting here that we maintain our target in the number of employees at 16,000 despite the fact that we have decided to keep the US tower plant.
We estimate to get to the target of 16,000 despite that fact by divesting the machining and costing units, which will represent approximately 1,000 employees, but also continue layoffs and hiring freeze in the group. If we continue to slide number 19 and the fixed cost, and you can see here if we compare to Q4 of 2011 with Q2 of this year, it has been quite a dramatic decrease. And this is clearly stating that we continue to deliver on the turnaround plan that was initiated. Going forward, we don't estimate that effect in the second half to be as dramatic as it has been in the beginning. By having said that, we will, of course, continue all focus on being more effective and continue to reduce cost wherever possible.
If you look at slide 20 and the service business, we have, if we compare to Q2 of last year, improved the service revenue by 10%. We have also had a good first half with a margin of 29%. We estimate that we will keep the number of employees at the 5,000-employee level, which means no headcount increases. A really positive factor is on slide 21, and it's the balance sheet. If you have a look at the net debt, it is a great improvement of close to EUR 400 million improvement or reduction. You also see that net working capital is improved. This is a key component in our turnaround plan and becoming more efficient in our use of capital.
And if you look at the non-current assets held for sale, they are reduced to EUR 21 million, and I will get into the details on the coming slide. So what you see here on slide number 22 is assets held for sale is decreased to EUR 21 million. And there is a reversal of write-down in the Pueblo plant as we have decided to keep the plant and also increased activities, so we for next year estimate a full capacity utilization in the plant. We also have to reclassify the sale. So the assets held for sale are reduced by EUR 98 million. And we also have further write-down that is partly offset by the reversal on machining and casting units.
The reason for the write-down is that we are in the midst of negotiations right now, and the indicative price tells us that we need to do further write-downs on those units. If we turn to slide number 23, and have a look at the change in net working capital. Again, if you compare over the last 12 months, there is a good improvement and, of course, lower activity also have an impact on inventories, which are down. Prepayments are consequently down, but please remember here and also look that they are not reduced to the same extent, which means prepayments includes also milestone payments. If you look at the change over the last 3 months, there's also a positive development on the net working capital. And, in particular, on the receivables, that has improved. So a lot of focus on all the items in the working capital.
You can see that payables are also increasing and despite partly offset by the slight increase in inventories in the quarter. If you look at slide 24, that represents our good quality improvement in the group. So a lot of focus on quality and quality improvements in the group. So, if you compare the warranty provisions in Q2 of last year with this year, they are down by 15%, so a very good achievement. The loss production, which represents less than 1.5% of our revenue, which I think is for any standard a very good achievement. The loss production factor continues stabilizing at a very satisfactory level, so below 2. If we go to slide 25 and the cash flow, and again a really, really good improvement. The change compared to last year is over EUR 500 million.
There is a sale of an owned project. And to be very precise, that represents EUR 109 million of the EUR 535 million. So despite that, if you would like to call it the extraordinary event, it is a very true operational improvement in the group when it comes to cash flow. That consequently leads to an improvement in the net debt, which has been reduced by EUR 500 million as the free cash flow or the cash generating part over the last 12 months is over EUR 400 million. That also has an impact on the net debt to EBITDA, which is reduced to 1.5. Slide number 26. I apologize for that. So if we then turn to slide 27, this is the really unsatisfactory part, which is the ROIC, and we are not satisfied with this level, of course.
Thereby, all the focus is really on the turnaround and the items that I have highlighted before. We need to improve earnings. We need to continue with the cost reduction. We also need to focus on the service business. The better capital efficiency will also continue. As stated earlier, that has really paid off in the quarter. If you please turn to slide number 29, we will have a look at the order intake. Order intake is improved, compared to Q2 of last year. We have an improvement of 74%, so quite a significant improvement. The average selling price compared to Q2 of last year has also improved. If you look at slide 30, that's the backlog, which now on the wind turbine side amounts to EUR 7.1 billion. So a slight improvement from last quarter.
And here the extraordinary event is that we have reversed some of the contracts that was in our order backlog. And the reason for doing that is that we have now done a thorough look through the backlog we have, and we have realized that it is a few projects that will not materialize, as the customers are don't can basically not fulfill their obligations under the contract's motive. Of the big part of that reversal is really customers in Central Europe, a specific customer in Central Europe. If you turn to slide 31, the backlog for service the service business is also increasing and now amounting to EUR 5.9 billion, which is an improvement by EUR 0.5 billion in the quarter. And the length is seven years on the service cost contracts that we have in the backlog. So, of course, a very good achievement.
The renewal rate is now amounting to 76% in Q2. This leads us to the outlook on slide 32. And here you can see that the outlook is changed, and it's the free cash flow that we're now guiding to a minimum of EUR 200 million. And we expect to see deliveries and the revenue to peak in the fourth quarter. And what we see now in the delivery plan that we have is that the margins in the delivered projects will be stronger in Q4 than in Q3. So really high activity and, to a certain extent, also some uncertainty. But the free cash flow that we guide for is a minimum of EUR 200 million. The other outlook parameters are the same as we showed you in the last quarter.
We also see, we have a strong foothold in the U.S., and we expect significant orders in the second half for the U.S. business. Again, as I said in the beginning, we have no plan to invest in new facilities going forward. Thereby, I would like to conclude that all efforts is on ensuring the deliveries of our turnaround plan in the second half of this year. So thank you for listening, and thereby we open up for Q&A. Thank you. If you have a question, please press star then one on your touch-tone phone. Patrik Setterberg from Nordea is on the line with a question. Yes, hello. A couple of questions from my side. I will start out with the prices on turbines.
A couple of your peers have been coming with some positive news on the pricing side, either indicating that they are stabilizing or slightly increasing. Are you seeing the same trend in the market as your peers? My second question is regarding your net working capital development in the second half. Given that your operational results will improve nicely in the second half, and you're still only guiding for a minimum EUR 200 million free cash flow for the full year, are you assuming that the working capital movements will be more unfavorable in the second half? And then my last question is regarding your equipment business because the service business is doing really nicely here in the second quarter, but you're still loss-making on the equipment side.
I'm just wondering, could you give a status on how the V112 cost overrun is going? Should we expect that this problem to be more, or improve, in a larger degree in the second half compared to what we have seen in the first half? Okay. If we start with your first question on the pricing, the pricing is, of course, very dependent on the markets and the products. So it's hard to say that, you know, if the prices are stabilizing across the board. What we showed here in the order backlog for this quarter, there is a slight increase compared to Q2 of last year. And if you look at, we are, as you know, not guiding on the net working capital, and we have now guided a minimum of EUR 200 million for the year.
Of course, what we see in the second half of the year is a very high activity level in the group, and that, of course, also gives some risk on projects being pushed. What I can say is, of course, that all focus will be to continue on the good path when it comes to the net working capital and thereby the improvements that we have delivered so far. If you – I'm not – I'm not sure that I understand your last question, but if you look at the service business, that is, of course, more stable than the overall product business. But we don't expect very high cost overruns on – or we don't expect cost overruns on the V112. Okay. Thank you.
Thank you. David Vos from Barclays is on the line with a question.
Yeah. Good morning there.
I just have a question on the cash flow development, if I can. Just if we look forward and we try to assess what a sustainable, you know, a free cash flow profile would look like, would it be fair to assume that you would see a material buildup in working capital again as activity levels pick up, say, you know, in 2014? That's the first question. Well, first of all, the parameters, the sort of management tools we have on the working capital, of course, we don't expect it to. We expect, let me put it this way. We expect that we can control the net working capital. There will be fluctuations in the quarter depending on the activity level. But we have done a lot of improvements that are very embedded in the way we operate going forward.
So, we don't expect that to be uncontrollable. And could you give us an idea of those improvements? Because if I look at, you know, for example, payables have gone up. What does that indicate? Your, your receivables have gone down, quite significantly. How have you been able to achieve that? And, and if you could particularly, kind of, give us a sense of what you would expect inventory levels to be going forward, that would be really helpful.
We have, during some of the activities to improve the capacity utilization. As I said, it's all the parameters in that is represented by the working capital. So we have a lot of focus on cash collections, and that has paid off. And that you can see in Q2, that we have an improvement of EUR 191, to be very precise.
I think what is important to highlight that it's not only payables, because, of course, you can push a problem or you can push an improvement. But this is truly operational improvement. So really focus on the way we operate from how we purchase to how we produce and how we sell.
Okay. Thank you. And then a second question relating to the, you know, putting the Pueblo facility back into normal operations. What gives you the confidence that, you know, that next year activity levels there will pick up? Is that an expectation of the USPTC being extended, or is it just based on the current, you know, backlog that you already have on your books?
What we see, and how we have decided to partly risk mitigate the situation, is that we see more orders and expect more orders in the US in the coming year.
Okay. Thank you very much. If no further questions.
Thank you. Mark Freshney from Credit Suisse is on the line with a question.
Hello. Good morning. Could I just ask on refinancing the bank facilities and the Eurobond? They're both, I understand, maturing in around about 18 months. And a company would normally expect to have an idea of how they refinance those, some way ahead of that. So can you perhaps give some color on the intended solution? Would you refinance those facilities, issue equity or convertible bond, or otherwise?
Thank you. Well, as you know and what has been communicated, it's not that long ago since we entered into a new agreement with the banks.
What I feel comfortable with is our own ability to generate cash. And as you can see, we have managed to reduce our net debt by over EUR 400 million, which gives us confidence that we can manage the situation going forward.
Thank you. Claus Almer from Carnegie is on the line with a question.
Yeah. Hello. I have several questions, one by one. The first question will be the divestiture of wind farms with a cash flow of EUR 100 million reported in the Q2 report. What has the impact been in the P&L? That would be my first question. Okay. So you want me to answer one by one?
Okay. The divestment of the wind farm in the P&L has been insignificant. So the big impact is on the cash flow.
In case you have had some revenue impact, but you say that there will be no profit impact. Yes, Klaus. That's correct. We have, of course, had the revenue and then an earnings element. But the big driver is the net working capital improvement.
Okay. Then, about your Q4 statement saying that you again will be backend loaded, what do you see of risk that could make some of the projects slipping to 2014? That would be my second question.
Yes. And as I alluded to earlier, of course, a busy second half, and it's, there's always a risk that some of the projects will enter into Q1. We will, of course, do our utmost to get everything that we expect into the second half of this year. But, is there some specific markets where you see a higher risk?
The question comes from the past where we have seen significant amount of revenue being pushed to the next year. No. I mean, we don't see any specific markets that are carrying a bigger risk than others. It's in general that we, of course, understand that that could be the case. But as I said, we will do anything we can to get everything that we expect into the second half. Right. And then only 2 questions left. The first one would be about U.S. orders. You said that you expect U.S. orders to materialize in next year, I think you called it. I guess that means the next 6 months, or is it the next 12 months? Next 6 months is the time frame we're seeing.
Right. Okay.
And then my final question, you wouldn't give some specific number on pricing due to the different nature of markets. But could you be more precise on the trends you see in the US and in Latin America and then Europe, please? That would be my final question.
Well, we, I'm not sure that I want to comment on, on the specific markets. It's a fair comment to say that they're, to a certain extent, are stabilizing, but it varies, quite significantly market by market.
Right. Okay. Thank you so much.
Lars Heindorff from ABG is on the line with a question.
Yes. Good morning. A couple of questions, as well. First of all, group costs, are you still taking out quite a bit of, of group costs, here in the quarter?
And I'm curious to find out if the level of group costs that we have seen here in the second quarter, if that is what we should use as a run rate going forward, or do you expect that you will be able to lower that much further? On the group costs, and I tried to allude to that, is that you can use the run rate as you see now. That's more or less what we expect to be the run rate going forward. And again, what I said is also, of course, anything we can reduce in terms of costs, we will, of course, do that. And some of the activities that we have now in place due to the turnaround plan, will be embedded in the organization. So it is a different way of working, going forward. Okay.
And then regarding your turbine production, you also said earlier that the value of the margins in the backlog has improved significantly. I mean, you're still not where you're supposed to be, in terms of the margin in the turbine production. I mean, how much further up do you expect the margin of the backlog can move? Well, we will not guide on how what we expect. What, what I can say is, I don't think I used the word significantly, but it has improved. It's, of course, part of the improvements in the margins is what we're doing right now in terms of becoming more operationally efficient. And so we will continue with the cost reduction, cost reduction that has been initiated. And we will, of course, also continue to look at the any divestments going forward.
Okay.
And then, last but not least, I mean, the write-down in the backlog, you commented shortly on that as well and said that it was Central Europe, I think you said. Can you say is it any in a certain sort of kind of customers, or do you see any risk in other parts of the backlog?
I think that if you look at the order of magnitude on what we are taking out from the order backlog, it is not huge compared to the overall order backlog. So we don't see any specific pattern. But we can see that the order backlog in what we're taking out is highly represented by Central Europe. But it's not a great concern for us.
It's more that I had the opportunity now to really make sure that all the order backlog is very current and that we feel comfortable that we will deliver everything we have.
Thank you very much.
Arnaud Brossard from BNP Paribas is on the line with a question.
Hi. Thank you, Arnaud Brossard. Three questions. The first one is on prices. You're saying they are stabilizing. Could you tell us how sustainable you believe this is and what changes have led to this improvement in your view? Second question on financial charges and taxes for the year. Could you give us an indication of what you expect? And finally, how many employees are there in your plant in Pueblo? And where do you expect to increase the staff cuts to offset the fact that you're now keeping the Pueblo plant?
Thank you.
Okay. If you look at the prices and what I said that they are stabilizing, on the price question and I think you know this is of course it's not only us that is affecting the overall price picture. It's also the behavior of competition. So overall, as I said, the prices are more stabilizing. We are also a very global company, so that also enables us to improve and select the different projects. If you look at the staff cuts, and I think what I tried to explain anyway was that we have seen increases in Pueblo, as we are ramping up the plant. That will be mitigated by further layoffs. What we have done so far is of course focus on the salaried employees.
We will also continue with the hire increase, and also as we are continuing the negotiations to divest the machining and component. And we are not guiding on the taxes or the financial charges.
All right. Thank you.
Thank you. Paschel Amad from Handelsbanken Capital Markets is on the line with a question. Yes. Paschel Amad from Handelsbanken Capital Markets.
A few questions from my side, and I'll try and take them one at a time. The first one basically relates to your write-down of your backlog. How does this impact the P&L, cash flow, and balance sheet, if you could just comment a bit on that?
Well, as I said again, we have taken the opportunity. But I think if you look at the size of the order backlog, it's not huge. There is a cancellation fee for any project that we potentially would cancel.
So, we will get paid for the cancellations that we have now. Has that significantly—I mean, has this significantly impacted the cash flow in the quarter and also the inventory reduction and receivables improvement which you have reported?
No. To all of your questions.
Okay. So the way it works is that normally or generally, a cancellation fee is more or less the prepayment that we have already in there. So there's no real changes here. But that must be impacting your gross profits line? No. Not significantly. No.
Okay. Perfect. I'll just move on to my next question. I believe, Marika, you commented that one should be using your run rate for Q2 capacity costs going forward.
profitability improvement, if you look going forward, should that be volume-driven going forward, or what other levers do you really have here?
I mean, I think what we're showing you both compared to Q2 of last year and Q1 this year is, of course, it's a volume, and it is a cost reduction. So it's the combination of the two that will improve, consequently will improve the EBIT.
Okay. But there aren't any plans to, I mean, look further on the cost base in the group, both manufacturing-wise and on the white-collar side, to lift profitability. I mean, are you satisfied with the kind of profitability you will be able to deliver in on the current run rate of sales level?
Of course.
We are not satisfied with the current level. So, we will, as I alluded to, we'll continue. I think it's very important that we focus on delivering the turnaround plan that has been communicated both internally and externally. But the focus is to continue improve the profitability for Vestas.
Okay. And my last question really relates to your comments about the U.S. market, that you have a strong foothold in this market and you're seeing a pickup in market growth in this market. I mean, could you try and give us an understanding what kind of markets do you see in 2013 and 2014? What kind of installations do you think one should be expecting in this market? And maybe also comment a bit on your market share development.
How do you see that developing in the US, in this PTC cycle?
Okay. I think we're getting very close to a 2014 guidance on those questions, so I will not comment on that. Is there any reason that your market share this year should fluctuate, compared to what you did in the last PTC cycle? We don't see any reason for that.
No. Okay. Thank you very much.
Thank you. Daniel Patterson from SEB is on the line with a question. Yes. Hello, Marika and Lars. A couple of questions. I'd like to take them one by one if possible. Firstly, on technology. Obviously, you've the V112 in good serial production. You've also launched other, newer turbine models, recently. Are you able to get higher prices and get the prices that you want for those turbines and hopefully, therefore, also higher margins?
So what are you seeing on, let's say, technology impact in the market? I think that we see ourselves as a technology leader. So, of course, we anticipate to get paid for any development that we perform on the turbines.
Okay. And then, perhaps adding on to that, I think Patrick had a question along those lines regarding the cost-out initiatives on the V112 turbine. Are you basically done with those cost-out initiatives now? We have done a lot, but we will continue to do more. Like, any flavor, any examples of what you can actually do to lower cost? I think you know all the levers you have on the cost reduction. So it's the full chain. It's what we do ourselves is what we source and so forth.
Okay. Then I have another question regarding the project margins.
Now, I know you don't disclose them, but in the first quarter, you obviously said they were low impacted by specific projects. The way I worked it out, around 20%. And here in the second quarter, it looks like it's about 30%. So my question is really, is the Q2 project margins and you don't need to give us a number here, but are they then reflective and representative of what you have in your backlog? Well, again, as I said before, we're getting very close to a guidance for next year. What I can say is we have a very busy second half, and we have made improvements in the second quarter on the margins.
Okay. Well, then my final question relates to net working capital. We've touched slightly upon it before.
Obviously, a phenomenal improvement here in the second quarter, even if we exclude the EUR 109 million divestiture. Is it reasonable for Vestas to be operating in general with basically zero net working capital?
Is that plausible?
Yes. It is possible.
Okay. That was clear. Thank you very much.
Thank you. Sean McLoughlin from HSBC is on the line with a question. Yes. Good morning. A few questions for me. If you could, first of all, just explain what's happened to the backlog pricing in Q1. It's gone up to 109, versus 104 at the Q1 stage. I'm wondering if that's got anything to do with the changes you've made to the order backlog. Secondly, you've reiterated your long-term targets in the statement.
I mean, could you, Marika, tell us how happy you are with these at this stage, and when we could maybe expect a fuller, proper update of these targets? And thirdly, on the divestment of machining and casting units, any indication of whether you expect this in 2013? Hi, Sean. This is Lars here. I think the first question that is a mistake from our side. We were simply writing the wrong number in the Q1 presentation. Okay. If you go to the EBIT margin that you were asking about, and I think it's we have set a minimum of 1%. And that is clearly and I said that as well before is not a satisfactory level, but we will of course continue to deliver anything above a minimum of 1%.
But I'm referring specifically to the long-term margins with the normalized market that are reiterated in this statement. And I'm wondering, you know, how happy you are with this now that, I guess you've had time to assess things in a lot more detail. You cannot be happy with that level. So as I said in the beginning and continue to emphasize this, we will continue. We need to improve the earnings going forward. If you look at the ROIC we have, I mean, one of the levers is, of course, improve the earnings. I think we've done a very successful first or second quarter and first half of this year in terms of improving the net working capital. So a lot of emphasis on improving the earnings going forward.
Okay. On the divestment? Sorry. I don't recall your question. Can you? Sorry. The timing of the divestment of machining and casting units? Oh, that's difficult to say. As I said, and also was in the pack, was that we're in the midst of negotiations. And, of course, everyone hopes to conclude it as quickly as possible. You would hope in 2013? Yes. Thank you. Thank you. Klaus Kehl from Nykredit Markets is on the line with a question. Yeah. Hello. Klaus Kehl from Nykredit Markets. Two questions. First of all, you say that these cost savings, they will or you are on track to reach more than EUR 400 million in cost savings. But what is the current run rate here for 2013, and how much above 400 million are you targeting? That would be my first question.
What we said that the run rate for going forward will be more than EUR 400 million in reduction. We are striving for more cost reduction. And that is also a big lever to get above the minimum 1% EBIT. Yeah. But I mean, above EUR 400 million, that could be EUR 500 million, EUR 600 million, EUR 700 million. I guess it's not that high. But could you try to quantify this more than 400? I will not be more specific than that we're striving for more than 400. Okay. Could you indicate what the run rate is for 2013? I guess we must be around EUR 300 million in that range. Lars, I think it's fair to say that if you look at our presentation, that the EUR 400 million is more or less in the back.
We are now striving to get into the more-than territory as high as possible, of course. Okay. Then my follow-up, my second question would be a follow-up on one of the previous questions. Your financial target is to reach a high single-digit EBIT margin mid-term. When will you update us on that given what you know about cost initiatives, prices, volumes, etc.? We will, of course, get back to that at the appropriate timing. For now, I just emphasize that we will do our utmost to improve the minimum 1% EBIT. Yeah. But what about this mid-term target, high single-digit that's between 5%-10%, I guess? Yeah. You're absolutely right on that. But we will get back to you on that at the appropriate timing. Okay. Thank you very much. Thank you. All right. Could we please have the final question?
Shai Hill is on the line, with the final question. Right. Just to make sure my question's been answered, Lars, Marika. So just two, really. First of all, just on pricing. I'm sorry to have to keep coming back to it. But it, it just seems to me that there's obviously when we talk about price per megawatt, there's a mix, a sales mix effect in there. And I just wondered, Marika, if you can give us an indication of, as accurate a picture of like-for-like pricing as we are seeing on new orders. So when one of your sales staff is negotiating on a contract for V112s, for example, in Germany, or in America, give us some insight on what the kind of pricing is looking like now relative to the end of last year on a like-for-like basis. And the second question is just on the cost savings.
So we're talking about a EUR 400 million run rate. Is the run rate now already at the end of Q2? But the sort of 1,000 machining and casting employees to leave in the second quarter, is that incremental cost savings to that EUR 400 million, please? The people leave, I would say it's not that significant, as it's not that many salaried employees in the machining and casting units for obvious reasons. So should not expect a huge impact from the divestment in terms of cost reductions. When it comes to pricing, it's difficult for me to be more precise than what I have been. We overall see that prices are stabilizing. And we, it is difficult depending on the country mix, and also type of products.
So it is big variations in between the different regions and also countries. Okay. Thanks, Elan. Thank you. Oh, Lars, today's last question. I'll now give the word back to your host. Okay. Again, I would like to thank you, everyone, for participating in this earnings call. I wish you all a good day. Thank you.